Lose but pay anyway: New crypto tax faces backlash

Controversy is growing over whether the tax system treats crypto and stocks fairly and whether authorities have enough information on overseas transactions, just over two months before a new tax law is set to take effect.

Under the upcoming rule, losses in crypto assets from previous years will not be carried forward and deducted from later gains.

For example, if an investor loses 100 million won ($74,900) on crypto in one year but then makes 50 million won in the next, they would owe 10.45 million won in tax on the second year’s gains, despite being down 50 million won overall.

A revision to the Income Tax Act introduced this crypto taxation system in December 2020, and it is scheduled to take effect on Jan. 1, 2027, after three delays. Annual income from selling or lending crypto assets will be taxed at 22 percent — including local income tax — after excluding necessary expenses and a basic deduction of 2.5 million won.

The biggest issue is the lack of a loss carryforward provision.

Gains and losses from transactions within the same year can be combined, but the latter cannot be carried over to the following year.

In the example above, 47.5 million won of the 50 million won earned in the second year would be taxable only after the basic deduction is applied. The investor would therefore owe more than 10 million won in tax despite having lost a total of 50 million won over two years.

Critics say that such code runs counter to the basic principle that “taxes should be imposed based on income earned.”

Other countries allow investors to deduct losses from gains in later years.

The United States lets unused capital losses from crypto investments be carried forward indefinitely, according to research by the National Assembly Research Service and others.

Germany also allows investors to deduct taxable losses from the disposal of private assets from gains from the same category of transactions in later years.

Japan has revised its tax law, subject to a revision of its Financial Instruments and Exchange Act, to introduce separate taxation of crypto income at 20 percent and allow losses to be carried forward for three years.

The difference in tax treatment between stocks and crypto is another source of controversy.

A retail investor who earns 10 million won in annual gains by selling domestically listed stocks on the exchange pays securities transaction tax and other charges but no capital gains tax. However, one who earns the same amount from spot crypto trading after expenses would owe 1.65 million won.

The government initially pursued crypto taxation — as well as plans to introduce a financial investment income tax that would expand taxation of stock investment gains while reducing the securities transaction tax — in 2020.

It later abolished the financial investment income tax but kept the tax on crypto income, meaning that one of the assumptions underpinning the original tax framework has changed.

That is why calls have continued for the government to consider imposing a transaction tax on crypto instead of an income tax.

Another problem is the time lag in obtaining tax information on overseas transactions.

Korea will begin exchanging information under the Crypto-Asset Reporting Framework in 2027, according to data that Rep. Kim Sang-hoon of the main opposition People Power Party (PPP) obtained from the National Tax Service. 

Singapore and the United Arab Emirates will not begin exchanging information until 2028, while the United States is scheduled to start in 2029.

For domestic exchanges in Korea, authorities can check reported income against transaction data submitted by exchange operators. But for some overseas trades, they may face delays in receiving the information needed for such checks.

This could make it harder to detect and verify unreported income from overseas transactions, potentially creating a gap in how effectively taxes are enforced between users of domestic and overseas exchanges.

The PPP has introduced competing bills to either delay the crypto tax, led by Rep. Kim, or scrap it altogether, led by Rep. Song Eon-seog.

The ruling Democratic Party also moved toward another delay — a first for the ruling party — on Oct. 15, with Rep. Park Min-kyu preparing a bill to postpone the tax from next year to 2029. 

“We should delay taxation of digital assets and focus on enacting the basic act on digital assets,” Park said.

The mood within the government has also shifted.

At his confirmation hearing last month, Finance Minister Lee Hyoung-il said that it would be desirable to begin taxation next year as scheduled.

However, the minister gave a less definitive answer during a parliamentary audit on Oct. 6. When asked whether the tax would go ahead as planned, he responded that the government would gather a range of views.

The minister’s decision not to directly answer a question about another delay has drawn market attention to the possibility that the crypto tax could be postponed for a fourth time.

BY KIM DA-YOUNG [[email protected]]